Douglas Elliman - Q2 2024

Transcript

Operator (participant)

Welcome to Douglas Elliman Second Quarter 2024 Earnings Conference Call. This call is being recorded and simultaneously webcast. An archived version of the webcast will be available on the Investor Relations section of the company's website, located at investors.elliman.com for one year. During this call, the terms Adjusted EBITDA and Adjusted net loss will be used. These terms are non-GAAP financial measures and should be considered in addition to, but not as a substitute for, other measures of financial performance prepared in accordance with GAAP. Reconciliations to Adjusted EBITDA and Adjusted net loss are contained in the company's earnings release, which has been posted to the Investor Relations section of the company's website. Before the call begins, I would like to read a safe harbor statement.

The statements made during this conference call that are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission filings. Now I'd like to turn the call over to the Chairman, President, and Chief Executive Officer of Douglas Elliman, Howard Lorber.

Howard Lorber (Chairman, President, and CEO)

Good morning, and thank you for joining us. With me today are Richard Lampen, our Chief Operating Officer; Brian Kirkland, our Chief Financial Officer; and Scott Durkin, President and CEO of Douglas Elliman Realty, our residential real estate brokerage business. On today's call, we will discuss the current operating environment and Douglas Elliman's financial results for the three and six months ended . All numbers presented this morning will be as of , unless otherwise stated. We will then provide closing comments and open the call for questions. Before I turn to our results, I want to begin with an update on certain matters. First, in July 2024, we were pleased to have received a $50 million growth investment from Kennedy Lewis, a leading credit-focused alternative asset management firm.

We believe this positions us for strategic growth and expansion, and we look forward to tapping into the network and knowledge base of Kennedy Lewis as we collaborate to drive long-term stockholder value. Second, in June 2024, we were pleased to receive preliminary court approval of our settlement of the pending seller class action litigation relating to real estate brokerage fees, which will also resolve other similar pending litigation. Now, we will discuss our outlook on our current operating environment, as well as trends we are seeing in residential real estate. As discussed in previous quarters, generationally, high interest rates have driven sustained listing inventory shortages across our luxury markets for more than two years. These shortages have resulted in significantly lower transaction volumes during this time. While we expect these industry-wide challenges will continue to impact our results, we remain encouraged by recent improvements.

First, our second quarter revenues and gross transaction values increased from the prior year period by approximately 4% and 7%, respectively. Further, average daily cash receipts from existing home sales in July increased by approximately 12% compared to July 2023. This continues a trend that began in October 2023. We believe this is evidence of the market's gradual adjustment to higher interest rates. Second, we continue to see momentum in our development marketing business, a platform that differentiates Douglas Elliman from our competitors. Through its development marketing division, Douglas Elliman employs a hybrid broker model, where our top resale residential real estate agents work in tandem with our development marketing professionals and leverage their extensive industry relationships for the benefit of our developer clients.

Our agents can market and sell high-profile developments that enhance their brands and provide additional commission potential for years, as they are often hired to resell or rent those very same units. Consequently, Douglas Elliman Development Marketing continues to be sought after by well-known real estate developers. This division has an active pipeline of signed and new projects of approximately $26.5 billion gross transaction value, including approximately $16 billion gross transaction value in Florida alone. We believe this bodes well for the future, as we will recognize commission income from these projects when they close. Third, listing volume increased 23% in the second quarter of 2024 from the prior year period, as Douglas Elliman continues to be the leader in the luxury markets it serves.

The advent of the $100 million-dollar listing is upon us, and we are well positioned to market and sell these prestigious homes. For example, during the quarter, we won significant nine-figure exclusives in Orange County, California, Snowmass, Coral Gables, Florida. The increases in total listing volume follows a 6.7% increase in the first quarter compared to the first quarter of 2023, and a 25% increase in the fourth quarter of 2023 compared to the fourth quarter of 2022. We believe we are already seeing the impact of increased listing volume, and this trend will continue in the remainder of 2024 and into the first quarter of 2025.

Consistent with the increase in listing volume, our average sales price per transaction remained an industry best, $1.81 million in the second quarter and was $1.64 million for the past four quarters. We believe the consistency in our average sales price per transaction reflects the strength of our luxury markets, as well as Douglas Elliman's reputation for offering the finest properties and client experience in real estate. Finally, our cost reduction efforts have been judicious, and the results of our strategy are beginning to flow to the bottom line. Over the past year, we have continued to adjust our cost structure to better fit our business, including additional headcount reductions, cutting costly sponsorships, streamlining advertising, and commencing a program to consolidate office space.

Our real estate brokerage segment reduced its operating expenses, excluding commission expenses, litigation settlement expenses, restructuring, and other non-cash expenses by $11.3 million in the first half of 2024, representing a decline of approximately 7.9% compared to the prior year period. Over the last 12 months, ended June 30th, 2024, our real estate brokerage segment has reduced its operating expenses, excluding commission expenses, litigation, settlement expenses, restructuring, and other non-cash expenses by $21 million, or approximately 7.3% compared to the 12 months ended June 30, 2023. We believe these efforts are enabling Douglas Elliman to meet industry challenges head-on without significantly impacting the agent experience. We are proud to share that our agent retention rate stands at 88%, and we continue to attract the industry's best talent.

Now, turning to Douglas Elliman's financial results for the three months ended . Douglas Elliman reported $285.8 million in revenues compared to $275.9 million in the 2023 period. Net loss attributed to Douglas Elliman for the second quarter was $1.7 million, or $0.02 per diluted share, compared to $5.2 million or $0.06 per diluted share in the 2023 period. Adjusted EBITDA attributed to Douglas Elliman in the second quarter were income of $2.4 million, compared to a loss of $2.6 million in the 2023 period. For comparison purposes, our real estate brokerage segment reported operating income of $2.9 million this quarter, compared to an operating loss of $1 million in the 2023 period.

Adjusted EBITDA attributed to the segment were income of $6.6 million, compared to $2.5 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the second quarter was $1.1 million or $0.01 per share, compared to $4.9 million or $0.06 per share in the 2023 period. Douglas Elliman has maintained ample liquidity with cash and cash equivalents at June thirtieth, 2024, of approximately $92.9 million. Now, turning to Douglas Elliman's financial results for the six months ended . Douglas Elliman reported $486 million in revenues, compared to $489.9 million in the prior year period.

Net loss attributed to Douglas Elliman for the second quarter was $43.1 million or $0.52 per diluted share, compared to $22.8 million or $0.28 per diluted share in the 2023 period. Net loss attributed to Douglas Elliman in the 2024 period included a $17.75 million litigation settlement charge, of which we have paid $7.75 million in June 2024. Adjusted EBITDA attributed to Douglas Elliman in the six months ended June 30th, 2024, were a loss of $15.9 million, compared to $20.2 million in the 2023 period. For comparison purposes, our real estate brokerage segment reported an operating loss of $32.3 million for the first six months of 2024, compared to $18.4 million in the 2023 period.

Operating loss in the 2024 period includes the $17.75 million litigation settlement charge. Adjusted EBITDA attributed to the segment were a loss of $7.6 million, compared to $10.5 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the six months ended June 30th, 2024, was $24.8 million, or $0.30 per share, compared to $21.6 million or $0.27 per share in the 2023 period. In summary, we are confident that Douglas Elliman is positioned for long-term success with its differentiated platform, continued cost reduction efforts, and strong luxury brand. Our proven management team has a successful history of navigating many economic cycles and applying financial discipline that balances the importance of maintaining revenues and managing operating expenses to create long-term stockholder value.

Looking ahead, in addition to driving operational efficiencies, we are focused on strategic market expansion, continued recruitment of outstanding talent, and further adoption of innovative solutions to empower our agents. With that, we will be happy to answer questions. Operator?

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press star and one on your telephone keypad. You may withdraw your question by pressing star two. Once again, to ask a question, please press star and one on your telephone keypad. We'll take our first question from Soham Bhonsle with BTIG. Please go ahead. Your line is open.

Soham Bhonsle (Senior Analyst)

Hey, good morning, everyone. So first one, you know, I guess, Howard, more recently, you know, we've seen an increase in inventory in some of your core markets like Florida and Texas, and I think you sort of noted that in your comments as well. So I guess wondering, you know, what you're hearing from agents as to why that's maybe not translated into more transaction unit growth this quarter? Because, as you know, when I sort of break down your GTV performance into units and price, it looks like, you know, units were still down 3%. So yeah, any thoughts there would be helpful. Thank you.

Howard Lorber (Chairman, President, and CEO)

Yeah, I mean, look, I think people are still waiting. The inventory is building a little bit because they're still waiting for rate cuts, okay? It's hard, you know, you have inventory build, and then, you know, there's really less buyers at most levels, or especially at the lower-end levels in the market because of rates. So hoping that we will have some rate cuts before the end of the year, you know, who knows? I mean, we'd be really happy with, you know, two quarter point cuts, but there's also been talk of a half a point cut and then a quarter of a point cut before year-end. And we're sure we'll see the inventory really going down as people decide to make new purchases from the current inventory.

Soham Bhonsle (Senior Analyst)

Okay, and then, Brian, I guess you did in the prepared comments say, I think, up 12% on cash receipts. Can you just remind us how that actually translates into revenue going forward?

Brian Kirkland (CFO)

Sure. I mean, so you can obviously we've had really good performance in 2024 compared to 2023. Up 12%, our margins are running anywhere between 20% and 25, so that really depends on regions going forward. But what we're seeing is a very strong market.

Soham Bhonsle (Senior Analyst)

Okay, and I guess-

Brian Kirkland (CFO)

To answer your... To add a little to the previous question-

Soham Bhonsle (Senior Analyst)

Yep.

Brian Kirkland (CFO)

We are starting to see the impact of that listing as we've seen strong July in particular. So it does take, because we recognize revenue when the earnings process is complete, that's only when the sale occurs. So we think that looks positive going forward.

Soham Bhonsle (Senior Analyst)

Okay, great. And then I guess on the capital raise, you know, it sounds like you're looking to deploy that for growth. So can you maybe just talk about, you know, whether you envision that spend going towards, you know, tuck-in acquisitions, or is it building out teams more organically, and then maybe just market that you'd be looking to target? Thanks.

Howard Lorber (Chairman, President, and CEO)

Look, you know, our expansion is basically limited to the states that really are no income tax states, because that's where people are going. So it's a number of markets we're not in, that we could be in. We've held back a little bit, but we have really, I think, most of the no tax states covered now. We're in Texas. We're doing well in Texas. We're in, obviously, Florida. Florida is still booming. It's somewhat shocking almost, because people just are coming to Florida in droves, and they're coming from all over. Most people think, like, most of Florida, you know, or a lot of it is coming from New York.

But having said that, you know, we see the California people also coming to Florida, and that's surprising. You know, the general thinking was that anyone from California that wants to get out of the tax position there is gonna go to Texas. Well, I think sometimes, you know, California is more aligned with Florida, and we've heard that a few times, you know, that people are... I have a neighbor in Florida on each side of me that came from California, so we know what's going on, and we're sort of happy with it. And we're gonna continue to be very careful with our money and work well. We will be working well with Kennedy Lewis, and we will be hopefully getting involved.

They are a big lender to developers, single-family home developers, and we're hoping to pick up some of that business, if possible.

Soham Bhonsle (Senior Analyst)

Okay. And then Brian, on expenses, so it looks like you've been able to bring down the G&A line nicely. But my question is more around the go forward.

Brian Kirkland (CFO)

Mm-hmm.

Soham Bhonsle (Senior Analyst)

So if, you know, volumes were to begin to inflect next year or in the back half of the year, you know, how are we sort of thinking about managing that line or just expenses, your fixed expenses in general, right? Should we expect that to continue to trend down, as, you know, some of your prior actions sort of flow through, or do you expect to add more folks to support the growth as you go forward?

Brian Kirkland (CFO)

So obviously, you're asking a question about scale. To answer your question, we do think we can scale expenses going forward, and we think that when revenues return, that will impact the business favorably. But let's just talk about where we were and then where we're going. So the contributions to our profits from the expense reductions really do reflect the work over the last two years. And this has been a gradual impact, and it's been building as management has been very deliberate on these expense cuts and has been focused on continuing expenses in a judicious manner. And otherwise, we're not penny-wise and pound-foolish. We're focused on continuing to enhance the agent experience, which is the number one driver of long-term stockholder value.

While initially, the expense reductions came from lower advertising, which is somewhat variable to revenues and personnel expenses, we're now seeing the impact of the eliminations of leases and sponsorships. So we'll continue to think smartly. We'll continue to, where there's a need to spend more on things like advertising, we will, but we're gonna continue to try to scale our expenses to the maximum amount possible.

Howard Lorber (Chairman, President, and CEO)

Right. And let me add something to what I was talking about before on expansion. You know, our way of expansion now is not to go buy a company, or not to start from scratch. But what we do is we go into markets, and most of these developers are, you know, do business in multiple states. So like, for instance, we have projects in Tennessee coming up. We don't have an office in Tennessee; we have a broker. And so that may be just for a while, just doing new development projects, which is a great part of our business. And that's pretty much how we save money in opening, you know, in opening other markets.

Soham Bhonsle (Senior Analyst)

Okay, understood. And just last one, on split, Brian, it was up 150 basis points. And look, we've seen pressure across the industry. Can you just maybe talk about some of the dynamics at play there? Thank you.

Brian Kirkland (CFO)

Yeah, of course. And this is a similar answer to the first quarter, but I'll give you the walk forward. So nothing has changed on the grid that we pay to agents in recent years. And we're looking region to region—if you look at the region-to-region commission splits, they're completely consistent. But what's happening is our margin analysis is really sensitive in mix, given the number of markets we're in. So specifically, Florida, which is a higher commission state, increased from 27% of our existing home sales in the 2023 second quarter to 30% of existing home sales in the second quarter of 2024. That accounted for.

If you look at the difference between that and New York City, that accounted for about half, about 0.5% of the 1.5% change in the margin. The remainder was due to the Douglas Elliman Development Marketing, which you know that business is sensitive to revenue recognition accounting, because we only recognize revenue and related profit on that business when the earnings process is complete or the sale closes. And as Howard said, we have a tremendous pipeline in that, and that looks good for future profits. The final impact was higher commission payouts on a percentage basis, and that was due to we're an ultra-luxury realtor. I mean, that's the bottom line. That's our market, ultra-luxury.

We had some really significant record-breaking transactions, some nine-figure transactions during the quarter, and that's gonna result in lower margins, but at the same time, it's gonna result in higher absolute growth profit.

Soham Bhonsle (Senior Analyst)

Understood. All right. Thanks a lot for the thoughts.

Operator (participant)

Our next question comes from Peter Abramowitz with Jefferies. Please go ahead.

Peter Abramowitz (VP of Equity Research)

Yes, thank you for taking the question. So if we just look at overall transaction value, in your business versus the overall market, it would seem that you gained market share this quarter. So just wondering if you could provide any context or comments around that, maybe what drove that, and if you think that's something that's sustainable going forward?

Brian Kirkland (CFO)

Obviously, record-breaking sales drove it. We have the best agents. We're an ultra, ultra-luxury residential real estate broker.

Peter Abramowitz (VP of Equity Research)

Gotcha.

Brian Kirkland (CFO)

And when you have

Howard Lorber (Chairman, President, and CEO)

Just to add, you know, we have, I think, in the whole industry, in the whole country, we have the highest level of sales. Our average sale is, what was it this year? Was $1.8 million, I think, right?

Brian Kirkland (CFO)

Yes.

Howard Lorber (Chairman, President, and CEO)

$1.8 million.

Brian Kirkland (CFO)

This quarter.

Howard Lorber (Chairman, President, and CEO)

The rest of the companies, even, you know, companies, no matter what size they are. There's I don't think there's anyone that's even close to that. I think they're all a million or less.

Brian Kirkland (CFO)

Yeah, I believe you're correct, Howard. And we also are in markets that in addition to record-breaking sales, in addition to being the name in ultra-luxury real estate, we also are in markets that are less mortgage rate sensitive. Mortgage rates were very high in the second quarter, so we are going to outperform in a quarter like that from that rate, from the interest rate perspective.

Peter Abramowitz (VP of Equity Research)

Okay, that's helpful. And then a question, just overall on the macro backdrop, obviously some volatile and wild moves in the market, and there seems to be maybe a little bit more concern around a recession today than there was a couple of weeks ago. Just if you could help us think through, you know, impact to your business. I know this, your core buyer is maybe less impacted by the macro backdrop and not as sensitive, but have you had conversations internally about how that affects the business? And could you help us think through, you know, if we do go into a recession, you know, how we should think about sort of the go-forward sort of medium term?

Howard Lorber (Chairman, President, and CEO)

Yeah, that's a tough question because, you know, we don't know how deep the recession would be, if there even is one. We keep hearing, you know, how many times have we heard about, "Oh, recession is coming, recession is coming," you know? It's, I don't think there's going to be any serious recession. There may be others that think the opposite, but I still say that we are in the best position in the industry to weather a recession. And that's what's important, because when you come out of that recession, if there is one, we'll be the number one—we'll continue to be the number one broker in the country.

Peter Abramowitz (VP of Equity Research)

Got it. And then one more, if I could. I think, Howard, you mentioned in your comments toward the end there, just on strategic market expansion. Could you touch on maybe some of the markets where you're thinking that may be a possibility, whether it's acquiring new teams or potentially just kind of beefing up for recovery, just markets overall, where you think the business could be expanding over the next year or two?

Howard Lorber (Chairman, President, and CEO)

Yeah, as I said, you know, one of the ways we're doing it without spending a lot of money is through new, new, new development. Because there's in some of these markets, there's, you know, really pretty much no one that does new development sales. So that's what we're doing, as I said, in Tennessee, and that's how we're building our, you know, pretty much all our markets, all our newer markets, including Texas and including Las Vegas. We have some great projects. And you don't have to spend much money to do that because we have the back office part of it in New York and Florida, and that can service the whole country pretty much. So we're not, we're not building like.

We're not going in and opening, you know, and then taking 5,000 sq ft and opening a big, beautiful new office. That, that we're not doing. We want to get business first before we open the office, and that has worked pretty well for us because we're very well known in the new development business. I mean, we, we have huge market share in, if, if you look at Florida, huge market share in Florida, and we haven't been there that long. I guess, how long have we been in Florida, DK? Maybe-

Brian Kirkland (CFO)

Eleven years.

Howard Lorber (Chairman, President, and CEO)

10, I was gonna say 10 years. 10, 11 years. And we built up where we're the number one broker in Miami Beach. We're the number one boat broker in Palm Beach County, and we're all the way up. Pretty much, we go halfway up on the east side, and we're now, you know, on the west coast of Florida. And they really don't have anyone that really knows the new development business like we do, and that's really been a huge help. And so we're gonna be going to places where there's business. It doesn't matter, you know, really where they are. If we can do it and do it economically and make money, we're doing it.

Peter Abramowitz (VP of Equity Research)

All right. That's all for me. Thanks for the time.

Operator (participant)

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Douglas Elliman's Quarterly Earnings Conference Call. Hope you have a good day, and this will conclude our call.

Howard Lorber (Chairman, President, and CEO)

Thank you.

Brian Kirkland (CFO)

Thank you.